Is This the Peak of European Growth?

Position: Bullish Bias on Germany (EWG); Long the British Pound (FXB)

 

The negative reaction from European capital markets to positive Q2 GDP numbers out of Europe today is another confirming signal of our call for “trouble ahead” in the region in the back half of the year.

 

We’ve maintained a bullish bias on Germany over the last weeks. Certainly the outperformance of Germany’s Q2 GDP print (2.2% Q/Q, the largest quarterly gain in over 20 years) over its European peers has also translated to its equity market outperformance: the spread of the DAX over Greece’s ASE is 2700bps! (see charts below)

 

Is This the Peak of European Growth? - mh1

 

Is This the Peak of European Growth? - mh2

 

However, our outlook on Germany and the region still remains cautious in 2H10. Importantly, we’re still looking for the DAX to confirm its TREND line of support at 6076 before we’re a buyer. We believe that August and September European data will be especially critical for it will show an inflection point to the downside.

 

Certainly Germany’s strong Q2 growth is in line with the fundamentals we’ve followed over the last months:  a weak Euro (esp. in May/June) boosted exports, German exports found strong demand from China, the country’s employment and inflation picture remains stable, and comps have been “healthy”, especially when compared with bombed out levels in 2009.

 

Yet the inflection we’re expecting to see has yet to show up in the data, both due to the skew in the numbers because of the World Cup in the early summer and the impact that austerity measures issued throughout European countries will have in 2H10 and 2011, namely in choking off growth.  

 

Taking a look at the charts below, “risk-on” in Europe has shown up over the last week.  Sovereign CDS for many European countries rose ~15-30% over the last week and Greece continues to flash weakness, with its 10YR bond yield spread over German Bunds busting out (see charts below).  As a reminder we believe that sovereign debt risks in Europe are not rear-view.  Debt come due this year and next is one outstanding issue that the ‘PIIGS’ will continue to wrestle with.

 

We remain long the Pound (FXB) with a trading range for the GBP-USD of $1.54-$1.61.

 

Matthew Hedrick
Analyst

 

Is This the Peak of European Growth? - mh3

 

Is This the Peak of European Growth? - mh4

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more